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Introduction To Finance: Course Code: FIN201 Lecturer: Tahmina Ahmed Section: 7 Email: Tahmina98ahmedsbe@iub - Edu.bd

This document provides information about an introduction to finance course including the course code, lecturer, section, chapter, and lecturer's email. It also includes sample problems and explanations of key concepts like the balance sheet, income statement, price-earnings ratio, book value, net worth, earnings per share, and constructing financial statements.

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Tarif Islam
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164 views

Introduction To Finance: Course Code: FIN201 Lecturer: Tahmina Ahmed Section: 7 Email: Tahmina98ahmedsbe@iub - Edu.bd

This document provides information about an introduction to finance course including the course code, lecturer, section, chapter, and lecturer's email. It also includes sample problems and explanations of key concepts like the balance sheet, income statement, price-earnings ratio, book value, net worth, earnings per share, and constructing financial statements.

Uploaded by

Tarif Islam
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Introduction to

Finance
Course Code: FIN201
Lecturer: Tahmina Ahmed
Section: 7
Chapter: 2
Email: [email protected]
Problem Solving: Balance Sheet
• Fill in the blank spaces with categories 1 through 7:

• 1. Balance sheet (BS) 5. Current liabilities (CL)


• 2. Income statement (IS) 6. Long-term liabilities (LL)
• 3. Current assets (CA) 7. Stockholders’ equity (SE)
• 4. Fixed assets (FA)
Indicate Whether
Item Is on Balance If on Balance
Sheet (BS) or Sheet, Designate
Income Which
Statement (IS) Category Item
___BS__ __CA___ Accounts receivable
___BS__ __SE___ Retained earnings
__IS___ _____ Income tax expense
___BS__ __CL___ Accrued expenses
__BS___ ___CA__ Cash
____IS_ _____ Selling and administrative expenses

__BS___ __FA___ Plant and equipment


__IS___ _____ Operating expenses
__BS___ __CA___ Marketable securities
__IS___ _____ Interest expense
___IS__ _____ Sales
____BS_ __CL___ Notes payable (6 months)
___BS__ ___LL__ Bonds payable, maturity 2019
__BS___ __SE___ Common stock
__IS___ _____ Depreciation expense
___BS__ __CA___ Inventories
_BS____ __SE___ Capital in excess of par value
___IS__ _____ Net income (earnings after taxes)

__BS___ ___CL__ Income tax payable


Price-Earnings Ratio
The price-earnings ratio (P/E Ratio) is the ratio between a company’s share price and
earnings per share (EPS).
In comparison to other companies in the same sector, the P/E ratio can also assist you
determine whether the price is high or low.
• P/E ratio = price per share ÷ earnings per share
For example, if two companies, ABC and XYZ, both sell for $50 a share, one may be
significantly more expensive.
Suppose ABC reported earnings of $10 per share, and XYZ reported earnings of $20
per share. ABC has a P/E ratio of 5, while XYZ has a P/E ratio of 2.5.
In other words, investors will pay 2.5$ for every 1$ earned per share in XYZ company.
This means XYZ is a better purchase at that time since the earnings is higher, and
therefore the P/E ratio is lower.
Price-Earnings Ratio Formula
Problem Solving: Price-Earnings Ratio
18. Botox Facial Care had earnings after taxes of $370,000 in 20X1 with
200,000 shares of stock outstanding. The stock price was $31.50. In
20X2, earnings after taxes increased to $436,000 with the same
200,000 shares outstanding. The stock price was $42.00.
a. Compute earnings per share and the P/E ratio for 20X1. The P/E ratio
equals the stock price divided by earnings per share.
b. Compute earnings per share and the P/E ratio for 20X2.
c. Give a general explanation of why the P/E ratio changed.
Problem Solving: Price-Earnings Ratio
19. Stilley Corporation had earnings after taxes of $436,000 in 20X2 with
200,000 shares outstanding. The stock price was $42.00. In 20X3,
earnings after taxes declined to $206,000 with the same 200,000
shares outstanding. The stock price declined to $27.80.
a. Compute earnings per share and the P/E ratio for 20X2.
b. Compute earnings per share and the P/E ratio for 20X3.
Concept of Net Worth
• Stockholders’ equity minus the preferred stock component represents
the net worth, or book value, of the firm.

What is net worth?


If you take everything that the firm owns and subtract the debt and
preferred stock obligation, the remainder belongs to the common
stockholder and represents net worth.
Total Assets = Total Liabilities + Total Equity.

Total Assets – Total Liabilities = Total Equity


Total Equity – Preferred Stock Dividends = Net Worth assigned to common
stockholders.
Concept of Net Worth
Concept of EPS and Net Worth
What is the difference between EPS and Net Worth Per Share?

• Earnings per share (EPS) is a figure describing a public company's


profit per outstanding share of stock.

• Net Worth Per Share is a measurement of the net worth of the company
for each share of stock that has been issued. Since Stock dividends are
cash that the company pays out to shareholders, this value cannot be
included in a company’s net worth.
Price Per Share (Recall)
The preferred stock investment position is $50,000, based on 500 shares at $100 par. In
the case of common stock, 100,000 shares have been issued at a total par value of
$100,000, plus an extra $250,000 in capital paid in excess of par for a sum of$350,000.
We can assume that the 100,000 shares were originally sold at $3.50 each, as shown
below.
Problem Solving: Book Value and Market Value
24. The Holtzman Corporation has assets of $400,000, current
liabilities of $50,000, and long-term liabilities of $100,000. There
is $40,000 in preferred stock outstanding; 20,000 shares of
common stock have been issued.
a. Compute book value (net worth) per share.
b. If there is $22,000 in earnings available to common stockholders
and Holtzman’s stock has a P/E of 18 times earnings per share,
what is the current price of the stock?
c. What is the ratio of market value per share to book value per
share?
Problem Solving: Book Value and P/E Ratio
26. Vriend Software Inc.’s book value per share is $15.20. If earnings per
share is $1.88 and the firm’s stock trades in the stock market at 3.5
times book value per share, what will the P/E ratio be? (Round to the
nearest whole number.)
• Book value = $15.20
• EPS = $1.88
• Stock price = 3.5 × book value per share
Problem Solving: Income Statement and Balance Sheet
Construction of income statement and balance sheet (LO1 and 3) For December 31, 20X1, the balance
sheet of Baxter Corporation was as follows:

________________________________________________________________________
Current Assets Liabilities
Cash $ 15,000 Accounts payable $ 17,000
Accounts receivable 20,000Notes payable 25,000
Inventory 30,000Bonds payable 55,000
Prepaid expenses 12,500
Fixed Assets Stockholders’ Equity
Plant and equipment (gross)…. $255,000 Preferred stock $25,000
Less: Accumulated Common stock 60,000
depreciation 51,000Paid-in capital 30,000
Net plant and equipment $204,000 Retained earnings 69,500
Total liabilities and
Total assets $281,500 stockholders’ equity $281,500
________________________________________________________________________
Problem Solving: Income Statement and Balance Sheet
Sales for 20X2 were $245,000, and the cost of goods sold was 60 percent of sales. Selling and
administrative expense was $24,500. Depreciation expense was 8 percent of plant and equipment
(gross) at the beginning of the year. Interest expense for the notes payable was 10 percent, while the
interest rate on the bonds payable was 12 percent. This interest expense is based on December 31,
20X1 balances. The tax rate averaged 20 percent.
$2,500 in preferred stock dividends were paid, and $5,500 in dividends were paid to common
stockholders. There were 10,000 shares of common stock outstanding.
During 20X2, the cash balance and prepaid expenses balances were unchanged. Accounts receivable
and inventory increased by 10 percent. A new machine was purchased on December 31, 20X2, at a cost
of $40,000.
Accounts payable increased by 20 percent. Notes payable increased by $6,500 and bonds payable
decreased by $12,500, both at the end of the year. The preferred stock, common stock, and paid-in
capital in excess of par accounts did not change.
a. Prepare an income statement for 20X2.
b. Prepare a statement of retained earnings for 20X2.
c. Prepare a balance sheet as of December 31, 20X2.
Homework
• Question number: 15, 23, 25
Thank You!!!
Course Code: FIN201
Lecturer: Tahmina Ahmed
Section: 7
Chapter: 2
Email: [email protected]

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